Medicare Medical Savings Accounts (MSAs) are a special type of Medicare Advantage plan that combines a high-deductible health plan (HDHP) with a medical savings account. The HDHP portion is a type of health plan where you have to pay a large annual deductible before your coverage benefits kick in. Specifically, you are responsible for the full cost of any Medicare covered services until you meet your deductible. After you meet the deductible, your plan covers 100% of all covered services.
The savings account portion is a savings account set up by your insurance company. Medicare annually deposits a predetermined amount into the account. The amount varies depending on the plan you select but is always less than your HDHP’s annual deductible.
Just like other Medicare Advantage plans, MSAs are offered by private insurance companies that are approved by Medicare. These accounts are tax-free and allow for tax-free withdrawals for medical expenses. While similar, these plans differ from regular Medicare Advantage plans in several ways, which we will get into below.
How MSAs Work
You can immediately pay for medical services with your MSA. You are not required to wait until you meet your HDHP’s annual deductible to access it. In fact, money you use from the account on Medicare approved health services will actually help you meet that deductible. For instance, say you have an MSA plan with a $4,000 deductible and Medicare deposits $2,500 annually into your MSA. If you spend your $2,500 on Medicare-covered medical expenses, you’ll meet your deductible. Now suppose you spend the $2,500 in another way. Such as $1,500 on dental expenses and $1,000 on medical costs. Only the $1,000 will count towards your deductible. This means you now have to pay an additional $3,000 before your deductible is met.
However, there are some rules to the MSA account that you should keep in mind. For one you don’t deposit funds into this account, but you can withdraw them at any time. The account will accrue interest, and any money you don’t use will carry over into the next year. While funds you use for medical services are tax-free, any non-medical expenses could cost you. You may face a 50% tax penalty for non-qualifying medical expenses, and the money will be considered taxable income.
Qualifying Medical Expenses
While all qualifying medical expenses are exempt from federal income tax, not all of them count towards your deductible. Keep in mind that if you use your MSA for expenses that don’t count towards your deductible, you may have to pay more out-of-pocket before your HDHP provides coverage.
Qualifying medical expenses that count towards your deductible are generally inpatient and outpatient services that Medicare Parts A and B cover such as:
- Hospital stays
- Doctor visits
- Durable medical equipment (DME)
- Home health care
- Skilled nursing care
Expenses that don’t count towards your deductible are:
- Dental care
- Vision care
- Part D or other prescription drug coverage cost-sharing (premiums, deductibles, copayments, coinsurance)
- Non-medical expenses (groceries, rent, utility bills etc.)
To enroll in a medical savings account plan there are some eligibility requirements. First you have to enroll in Medicare Part A and Part B. This can be easy if you are receiving social security benefits because then you will automatically be enrolled in Parts A and B. Also, if you are eligible for Social Security or Railroad Retirement Board benefits (RRB) you don’t have to pay a premium for Medicare Part A. So basically, if you qualify for Medicare you can enroll in an medical savings account. You can enroll in an MSA plan unless:
- You have health insurance that covers the Medicare MSA deductible. This includes benefits from an employer or union sponsored retirement plan.
- If you get benefits TRICARE or the U.S Department of Veterans Affairs.
- You’re a retired federal employee and participate in the Federal Employees Health Benefits Program (FEHBP).
- You’re eligible for Medicaid.
- You have End-Stage Renal Disease (ESRD), However you can still enroll in an MSA plan if you formally had a Medicare Advantage Plan and left Medicare and you haven’t joined another Medicare Advantage Plan yet.
- You currently receive hospice care.
- If you live outside of the U.S for more than 183 days a year in total, either consecutively or not.
Pros and Cons Of MSAs
Deciding whether or not to use an MSA is highly personal. You have to consider your current financial situation as well as any medical needs you need or anticipate needing in the future. Take a look below at the pros and cons list to help decide if this is the best plan for you.
If you are unable to afford the higher premiums of a traditional plan, the HGHP plans can prove to be a more cost-effective alternative. An MSA refuses total costs, creating a Medicare plan with several advantages, especially if you are in good health. You do not pay into this account so there are no additional enrollment fees. Additionally, funds roll over annually. So if you are in good health you have the opportunity to continue saving your MSA funds year after year. Thus creating a large healthcare fund for any emergencies. Finally, there is no tax penalty on funds you use for qualifying medical expenses. This allows you to spend the money on medical expenses without having to report it as income.
The most significant disadvantage of an medical savings account is the high deductible. If you don’t reach this deductible within the year you could be left with large medical bills that you have to pay out-of-pocket. Additionally, if you use the funds for non-medical expenses you face a severe tax penalty. Meaning you have limited financial flexibility in the event of a non-medical emergency.
Cost of MSAs
The premiums for these plans vary depending on your plan. Additionally you have to continue to pay your Medicare Part B premiums. Your out-of-pocket expenses will also vary based on your plan and how you use your MSA funds. Different plans have different deductibles, and Medicare deposits varying amounts of money into your account.
MSAs Vs. HSAs
In some respects, the concept of an MSA plan is similar to high-deductible health plans (HDHPs) and health savings accounts (HSAs). However HSA contributions come from your employer, you, or anyone else who wants to contribute to the account. Whereas MSA contributions come from your Medicare Advantage plan. The money comes from funds that Medicare allotts to you, meaning you cannot contribute to your own MSA.
You can then use the MSA funds to pay for medical expenses throughout the year. Your MSA withdrawals are tax-free as long as you use them for qualified medical expenses. You can also use the funds for non-medical expenses, such as groceries, rent or utility bills. However any non-medical withdrawals are considered taxable income and also have a 50% penalty.
Similar to HSAs, MSA funds that remain unused at the end of the year will roll over into the following year. If you maintain your plan then next year’s deposit will be added to the funds remaining from the previous year.
MSAs Vs. FSAs
An MSA is typically for Medicare recipients, while a flexible spending account (FSA) is typically for employees with optional coverage. Accounts for FSAs have a “use it or lose it” rule. Meaning the funds will not roll over. However, some plan administrators may provide brief grace periods at the end of a benefit year to give employees an extra chance to spend the funds. FSAs are not a great long-term savings option, even for those who can benefit from the tax savings they offer. Additionally, if you change employers, you will most likely lose your FSA. Unlike MSAs, FSAs typically do not allow you to use the funds for non-medical expenses.
When to Enroll
You can enroll in an MSA when you first become eligible for Medicare during your Initial Enrollment Period (IEP). This is the 7-month period that starts 3 months before you turn 65, including your birth month, and then comes to a close 3 months after you turn 65. If you are eligible for Medicare due to a disability, you can enroll 3 months before and after you’ve received at least 25 months of disability benefits. You can also enroll during the fall Open Enrollment Period, between October 15th and December 7th every year. If you enroll during this time, your coverage will start on January 1st.
Let EZ Help
If you’re interested in an MSA, EZ.Insure can help you compare options based on deductibles and benefits, such as vision and dental care. We will assign you with your own personal agent who can answer all of your questions and help you find the best plan while saving you money. Our help is totally free! To get your free instant quotes give one of our licensed agents a call at 877-670-3602 or simply enter your zipcode into the box below. Let us remove the hassle of shopping around and make it simple for you.